What is Liquidity in the Crypto Market and Why is it important?

3rd of January, 2024, it was heard that the crypto market liquidated over $800,000 in the market in one day. Many were confused when I posted this on my status. Some people were thinking is to give away that the crypto market was actually given to Traders not knowing it was more than what they thought.

Liquidity is the measure of how is easily one can convert an asset into cash or another asset. It is compared to buying $100 of Bitcoin on binance. You can do this without any impact on the price of Bitcoin. This is why the liquidity is important when it comes to assets.

This post gives us in details of what liquidity is and why it is important.

What is liquidity

Liquidity is a measure of the ease at which an asset can be converted to another like usdt to bitcoin without affecting the price of that asset. It means how quickly and asset can be bought or sold without having much effect on the asset's price. There are good and bad liquidity.

screenshot from one of my apps

Bad liquidity means the asset can't be bought or sold quickly without having a significant effect on its price while good liquidity means how quickly and assets can be bought also without having much effects on the asset price. The most liquid asset can be considered as cash or its equivalent because it can be easily converted to other assets.

One of such is the stablecoin which much of the volume in crypto ecosystem is done in stable coins making them liquid. Buying or selling an asset is a game of moving beats around computers as it provides some benefits to liquidity. There are basically two types of liquidity traditionally which are markets and account liquidity.

• market liquidity is the extent to which a market allows the assets to be bought and sold at safe prices that are closing to the actual or intrinsic value of that asset. By my use of the word intrinsic, it means the lowest price is seller is willing to sell is close to the higher price a buyer is willing to buy at bid which brings about the two values called bid-ask spread.

• the account liquidity is a term used in business context and balance sheets which refers to the east with which a company can use its current assets and cash flow to pay its current liabilities or debts. This type of liquidity is related to the financial health of the company while the market type of liquidity is exclusive to the health of the market.

The bid-ask spread as mentioned earlier is desirable for market that are liquid which means that the market must have good liquidity since swings in prices are brought back to be balanced by Traders continually.

This bid-ask spread is the difference between the lowest ask and the highest bid. A large bid-ask spread means a market is illiquid and that there is a big difference between way buyers want to buy and sell it want to sell. This bread can be useful to arbitrage Traders who exploits more difference in the spread time and again.

These Traders ensure that they reduce the spread and that the aren't big differences in price between the same market pairs on different exchanges. Reasons why the price of Bitcoin is roughly the same on the most liquid exchanges.

Pexel

Liquidities important when it comes to trading altcoins. Since cryptocurrencies are digital assets, they are not quite liquid at some assets have better liquidity than others. Liquidity of some crypto assets is lacking in the market but that of Bitcoin or ethereum is not lacking.

If one wants to build a position in a coin that is lacking liquidity, you may not be able to exit at your desirable price. That is why it is generally a better idea to trade or open positions with assets that has higher liquidity.

Disclaimer :Any financial and crypto market information provided in this post was written for informational purposes only and does not constitute 100% investment advice. It's just basic knowledge every crypto trader or investor should have